Investment Fund Clones Part III: International ADRs

by Maz Jadallah

A question we’re often asked about AlphaClone is whether we track hedge fund foreign stock holdings. The answer is no, and yes. A couple of weeks ago we highlighted how you can replicate foreign market ETF investments amongst top university endowments. We saw current quarter investments by endowments in ETFs that cover emerging markets (EEM), China (FXI) and Brazil (EWZ) amongst others. All pretty good bets because those foreign market ETFs are up 28%, 23% and 47% respectively year to date (the S&P 500 is up 1% year to date).

This week, in our third and final article in the series we’re calling “A Clone for Every Investor”, we’re going to highlight another way you can replicate top investor foreign company investments – by tracking their holdings in American Depositor Receipts, or ADRs. ADRs are the securities of foreign companies which trade on US stock markets, and there are perhaps hundreds of them broadly representing the world’s developed, developing and emerging markets.

To make it very simple for AlphaClone users to clone ADR investment behavior, we created the AlphaClone International fund group – which was constructed to include all hedge funds in our database but screened for just their ADR holdings. So, for example, the group’s Top 10 Popularity strategy invests in the ten most popular ADR holdings each quarter at the time they are disclosed to the public. As usual, all strategies are instantly backtested to the year 2000.

OK, that’s enough introduction - how do clones based on this fund group perform? The table below summarizes the group’s Top 10 Popularity clone over the 3, 5, and 10 year time periods. The results are compared against the S&P 500 Depository Receipts index.

Internatonal Fund Group - Top 10 Popularity
Performance Statistics (as of 2009-05-18)
	3 YEAR			5 YEAR			INCEPTION
	Clone	Index		Clone	Index		Clone	Index
Total Return	4.1%	-27.8%		127.6%	-16.8%		35.4%	-37.4%
Annualized Return	1.4%	-10.3%		17.9%	-3.6%		3.3%	-4.9%
Annualized Volatility	39.3%	19.6%		32.5%	16.4%		33.1%	16.2%
Sharpe Ratio	-0.1	-0.7		0.4	-0.5		0	-0.6
Max Drawdown	-63.7%	-48.8%		-63.7%	48.8%		-64.0%	-52.3%

The first thing that jumps out at you is how much better the clone performs versus its benchmark index. The clone’s annualized five year returns outperformed the index by over 21 percentage points! The clone’s volatility is double that of the index but it still trounces the index on a risk adjusted basis judging by its 0.4 sharpe ratio, as compared to the index’s -0.5. Finally, this clone is up 25.4% so far this year versus the benchmark, which is only up 1.1% year to date. That’s impressive performance by any measure and certainly worth considering as part of any investor’s international portfolio allocation.

Here's what the clone holds currently – at least until this Friday, May 22 when AlphaClone will rebalance all its clone portfolios based on 3/31/2009 period filings. Stay tuned.

Current Portfolio as of 2009-05-19		PRICE
NAME	TICKER	5/18/09	2/20/09*
AMERICA MOVIL SAB DE CV	AMX	$37.84	$28.00
BAIDU INC	BIDU	$243.59	$133.00
TEVA PHARMACEUTICAL INDS LTD	TEVA	$44.83	$46.00
LONGTOP FINANCIAL TECHNOLOGIES	LFT	$23.18	$15.00
RYANAIR HLDGS PLC	RYAAY	$28.35	$26.00
LDK SOLAR CO LTD	LDK	$ 8.20	$ 7.00
PETROLEO BRASILEIRO SA PETROBR	PBR	$39.40	$27.00
NEW ORIENTAL ED & TECH GRP INC	EDU	$53.42	$41.00
GOLD FIELDS LTD NEW	GFI	$12.11	$11.00
CHUNGHWA TELECOM CO LTD	CHT	$18.24	$15.00

* Prior rebalance date

Part I, Part II